An inflation report that has received little attention in the past is likely to draw widespread market attention on Thursday | Private Equity Weekly
With markets nervous about the direction of inflation, a report on Thursday that is often closely watched on the economy could become more important. The Commerce Department’s measure of personal consumption expenditure prices may provide further evidence that inflation is more troublesome than some economists and policymakers think. Despite nearly two years of tightening policies aimed at stemming the trend, January data is expected to show the cost of living remains above the Fed’s target. So-called personal consumption expenditures (PCE) are a popular measure among central bankers and are often viewed by investors as less important than monthly consumer price index readings. But maybe not this time. “This number is going to be hot,” said Mark Zandi, chief economist at Moody’s Analytics. “Inflation doesn’t move in a straight line. It zigzags, and it zigzagged in January.” Zandi expects personal spending this month The expenditure (PCE) price index will rise 0.4% at both the headline level and the core level (excluding food and energy). Core growth would be double December’s pace, another challenge for the Fed, which is expected to halt monetary policy adjustments at some point this year. However, he argued that policymakers should not overemphasize one number and instead look at the bigger picture, which he said showed a clear slowdown in inflation. Zandi is worried that maintaining austerity policies for a long time may severely damage the economy. “They should put that number aside and say, ‘OK, this is why we’re not going to change rates at the next meeting, but it’s not going to include our expectations or forecasts for future rate cuts,'” Zandi said. explain. “Inflation is definitely decelerating. All the trend lines look good.” Although inflation has eased from mid-2022 levels, the highest in more than 40 years, the unexpectedly strong performance of the consumer price index in January shocked Wall Street nerves. Several Fed officials later said they were concerned about inflation trends and needed more evidence of easing before they could approve a rate cut. “The bar is too high to expect all data to speak uniformly,” Boston Fed President Susan Collins said in a speech Wednesday. “Nonetheless, it is important to see sustained, broad-based progress toward the Fed’s dual-mission objectives. signs, while recognizing that progress may be uneven.” Collins added that while she still expected a rate cut this year, she believed the process would be done in a “methodical, forward-looking” manner and would be “step-by-step” rather than The market had previously digested the pace of aggressive interest rate cuts. . Market-based inflation indicators point to rising expectations. The two-year inflation breakeven point, or the difference between the yield on Treasury bonds and the yield on inflation-protected Treasury securities, has risen sharply in recent days. Benchmark 10-year Treasury bond yields rose nearly 25 percentage points in February, while 10-year TIPS rates rose more than 25 percentage points. US10Y US10YTIP 3M Line 10-Year TIPS Yield View Details The Fed takes PCE inflation more seriously than the Labor Department’s CPI report, which receives more public attention, primarily because it is considered a broader indicator that takes into account changes in consumption behavior rather than just focusing on a fixed set of goods and services. Officially, the Fed focuses on the overall data, but officials tend to focus more on the core data as a better indicator of long-term trends. CPI data, as well as the Producer Price Index (which also rose more than expected in January), are factored into the PCE’s calculations. Economists expected overall monthly gains of 0.3% and 12-month gains of 2.4%, according to Dow Jones estimates, following gains of 0.2% and 2.6% respectively in December. At the core, monthly and annual rates are expected to be 0.4% and 2.8%, respectively, compared with 0.2% and 2.9%, respectively, last month, according to the Dow Jones consensus forecast. However, it’s not just about broader reading. Policymakers and market participants will be paying attention to the details of underlying trends. Key indicators include housing and services indicators. Michelle Cluver, senior portfolio strategist at GlobalX, said: “The key area to really watch is the services portion of PCE. But this report is most likely to confirm what we saw in January’s CPI news. situation.” said Michelle Cluver, senior portfolio strategist at GlobalX, which operates a $5.1 billion global ETF portfolio. “We do expect to see deflation flowing into services as that is a key factor needed to reach sustainable levels of inflation.” Kluver added that attention would be drawn if personal consumption expenditure data confirms that inflation remains above target. Reports will turn to February and March, which could push the Fed to cut interest rates further. The market currently expects the first downward revision to occur in June or July. “If we continue to see hot data in February and March, then I will start to be cautious about June as the first rate cut meeting,” she said. This in turn raises concerns about the trajectory of the economy. Signs of Trouble Zandi believes that if the Fed insists on tightening economic policies, it may pose a major danger to the economic expansion. “I have been relatively optimistic about the economy, but I am increasingly nervous about some of the vulnerabilities in the labor market and financial system,” the Moody’s economist said. He added: “The only thing stopping the labor market from collapsing is layoffs. Rates are still very low.” “But I think the labor market is much more fragile than people think. I am increasingly worried that the Fed will make a mistake and intervene in the economy for a long time. So what is the purpose of doing this?” Wednesday’s report confirmed, Economic growth will be solid in 2023. After adjusting for seasonal factors and inflation, the annualized GDP growth rate in the fourth quarter was 3.2%. Although lower than the initial forecast of 3.3%, it still shows that the cornerstones of the U.S. economy, namely consumer spending and the service industry, remain solid. Additionally, the report showed that quarter-on-quarter weighted spending, adjusted for consumer behavior, rose 1.8% in the quarter, the smallest increase since the Covid shock in the first quarter of 2020. Additionally, weighted prices for goods actually fell 1.4% quarter-on-quarter, the lowest reading since the second quarter of 2020, indicating real deflation in much of consumer spending.
